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Can $LULU Shares Head North of $70 or $80 With Chip Wilson In The Rear View Mirror?

Editor's Note: This is an excerpt from recent research from our retail team. If you're an individual investor looking for high-quality research at a price you can afford we invite you to learn more.

 

When we added Lululemon (LULU) to our Best Ideas list back in June 2014 (we removed it from our Best Idea's List on 3/24/15) we outlined probable outcomes stemming from controversial founder Chip's Wilson’s activist push. Where we shook out after weighing the various puts and takes was:

  1. Chip would not get his way.
  2. Chip would eventually sell his stock.

Can $LULU Shares Head North of $70 or $80 With Chip Wilson In The Rear View Mirror? - 14l 

We have long maintained that Chip is a brand builder, not a brand leader. He was very vocal in an interview with PwC last year about his displeasure his non-compete imposed restraint. The writing officially appears to be on the wall for his complete exit from the company now that “Kit and Ace” (the luxury apparel brand founded by his wife and son) is nearing critical mass.

 

In our LULU Black Book in March 2015, we said that there’s $4.00 in earnings power hidden in this company, but we needed the conviction that management could find it. We are still far from convinced, though the leadership on the board has proven over the past year that it is willing to separate itself from Chip.

 

In order to justify a 30x p/e and give anyone hope of a share price in the $70s or $80s, we think that the company needs to completely reset its business model.


The UK, China and U.S. Jobs Report

Client Talking Points

UK

The UK election was a blowout verse mainstream expectations, British Prime Minister David Cameron and his Conservative Party have claimed an outright majority in Parliament, with 330 seats out of 650, and can form a new government. It was the biggest day for the UK FTSE 100 Index on a relative basis to other European stock markets of the year. There was a huge move in the British Pound over a percent this morning as well.

CHINA

You simply can't ignore what is going on in China. The PBOC came out and effectively said they were not going to do a massive QE. Export growth was down -6% year-over-year and imports were down -16%. China's economy is slowing at an accelerating rate, Chinese brokers are trying to create rumors about stimulus and the central bank is saying don't expect QE...all this was met by a rally in the stock market.

JOBS REPORT

Total NFP was basically inline with estimates, seeing an improvement sequentially. This is not much of a surprise since last month was the lowest number we have seen since December 2013. The jobs report showed a creation of 223,000 jobs and an unemployment rate of 5.4 percent. CLICK HERE to watch the special jobs report edition of The Macro Show.

Asset Allocation

CASH 60% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
RH

We think people are missing the magnitude of earnings growth at Restoration Hardware (RH), the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders. The question is not whether the stock will go to $110 vs $120 (where we see most price targets), but whether it will get to $200 vs $300. We think the catalyst calendar looks healthy starting with the 1Q15 print set to be release in early June. Following that, RH is set to pick up the cadence of its store opening, with 4 new stores set to be open in the back half of the year. This remains our favorite name in retail.  

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Builder performance was choppy in the latest week alongside beta volatility and investor attempts to square the net impact to housing from rising rates and ongoing improvement in housing fundamentals. As it stands currently, rates remain a tailwind to affordability relative to last year and would require a significant, expedited increase to have a material negative impact on housing activity in the immediate/intermediate term. Elsewhere across Housing Macro, the fundamental data continued to roll in strong.

TLT

Insomuch as the April Jobs Report may prove to be a bearish catalyst for Treasury bonds, slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop. Ultimately, we think our #LowerForLonger theme prevails, but volatility is likely to pick up in the interim.

Three for the Road

TWEET OF THE DAY

If you want the truth about the jobs numbers, start with sources who actually model them

@KeithMcCullough

QUOTE OF THE DAY

When he worked, he really worked. But when he played, he really PLAYED.

Dr. Seuss

STAT OF THE DAY

The average American consumes 48 pints of ice cream each year.


Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT

Takeaway: LULU/Kit & Ace conflict of interest makes Chip exit more likely. KATE - Buy the stock for Mother's Day. AMZN/EBAY ChannelAdvisor Comps.

EVENTS TO WATCH

Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT - 5 8 chart2 B

 

 

COMPANY HIGHLIGHTS

 

KATE - To see our full note KATE – Happy Mother’s Day CLICK HERE

 

LULU - Kit&Ace Conflict of Interest, Chip Exit More Likely

 (http://www.wsj.com/articles/an-exotic-cashmere-upends-lululemon-1431044063)

 

Takeaway: When we added LULU to our Best Idea's List in June of 2014 (we removed LULU from our Best Idea's List on 3/24/15) we outlined the probable outcomes resulting from Chip's activist push. Where we shook out after weighing the puts and takes was a) Chip would not get his way and b) eventually sell his stock. Chip is a brand builder, not a brand leader and he was vocal in an interview with PwC in 2014 about his displeasure his non-compete imposed restraint. The writing appears to be on the wall for his complete exit from the company now that Kit and Ace is nearing critical mass.

In our LULU Black Book in March 2015 we said that there’s $4.00 in earnings power hidden in this company, but we need the conviction that management could find it. We are still far from convinced, though the leadership on the board has proven over the past 12mnths that it is willing to separate itself from Chip. In order to justify a 30x p/e and give anyone hope of something in the $70s or $80s (presumably what you’re playing for in buying it today) we think that the company needs to completely reset its business model.

 

 

OTHER NEWS

 

EBAY, AMZN - ChannelAdvisor April Comp Sales

Retail Callouts (5/8): KATE, LULU, AMZN, EBAY, WMT - 5 8 chart1

 

WMT - Wal-Mart grabs some former Target Canada assets for $350-million

(http://www.theglobeandmail.com/report-on-business/wal-mart-grabs-some-former-target-canada-assets-for-350-million/article24326484/)

 

KSS - Kohl's expands 'shop online, pick up in-store' service

(http://www.retailingtoday.com/article/kohls-expands-shop-online-pick-store-service)

 

RL - Ralph Lauren Launching Luxe Concept in Milan

(http://wwd.com/retail-news/designer-luxury/ralph-lauren-launching-luxe-concept-milan-10125740/)

 

John Legend to Open H&M Store

(http://wwd.com/retail-news/mass-off-price/john-legend-to-open-hm-store-10125422/)

 

Warby Parker continues to expand, opens store in Chicago

(http://www.chainstoreage.com/article/warby-parker-continues-expand-opens-store-chicago)

 

JCP - Joe Fresh to be pulled from J.C. Penney stores in 2016

(http://www.theglobeandmail.com/report-on-business/international-business/us-business/joe-fresh-to-be-pulled-from-jc-penney-stores-in-2016/article24310076/)

 

Advent brings IPO of perfume chain Douglas forward - sources

(http://uk.reuters.com/article/2015/05/07/douglas-ipo-idUKL5N0XY5BW20150507)

 

Fitbit Files to Go Public

(http://www.nytimes.com/2015/05/08/business/dealbook/fitbit-files-to-go-public.html?_r=0)

 


Early Look

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REMINDER: TODAY AT 11AM - MACAU CONF CALL

We will host a conference call on TODAY, May 8th at 11:00AM ET to discuss the latest Macau data, our outlook on the market and the stocks and the presentation of a new, original research topic.

 

 

RELEVANT TICKERS INCLUDE:

LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

DISCUSSION POINTS

  • Details behind April's 39% GGR decline
  • Discussion of base mass trends
  • The impact of Mass re-classifications
  • Revised 2015 monthly market projections
  • Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment) 
  • Research Topic: Does stock market investing impact Macau gambling?

 

CALL DETAILS

Attendance on this call is limited. Please note if you are not a Tier 1 or 2 subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping  for more information.

 


CHART OF THE DAY: U.S. Economic Surprise Index

CHART OF THE DAY: U.S. Economic Surprise Index - Chart of the Day

 

Editor's Note: This is an excerpt from today's Morning Newsletter which was written by Hedgeye Senior Macro Analyst Darius Dale. If you're ready for some dynamic market and economic insight and analysis, we encourage you to subscribe.

 

Since this is probably the only strategy note you’ll read this morning that doesn’t focus on the jobs report, we’ll leave you with another piece of seemingly-random-but-useful analysis. The key takeaway from the Chart of the Day below is that over the next 2-3 months, the preponderance of high-frequency growth data is likely to look optically better relative to consensus expectations from here. It literally can’t get much worse as far as the surprise factor is concerned and we’re quite sure expectations for a broad swath of indictors were lowered after that soft 1Q GDP print. Also, 2Q GDP will accelerate on a headline (i.e. QoQ SAAR) basis.

 

We believe rates have likely priced in these dynamics and see no reason for bond yields to chase them any higher.


Dazed and Confused

"It is better to be a lion for a day than a sheep all your life."

- Elizabeth Kenny

 

Is it? In financial market terms that is.

 

While Nurse Kenny’s boldness served her well in her treatment of polio among other musculoskeletal illnesses (her controversial methods are credited with being the foundation for modern physical therapy), I’m not so sure she would’ve been able to manage global macro risks during confusing times like these with that attitude.

 

For example, what if you took on orange jumpsuit risk and got the look-see on today’s jobs numbers? Would you know how to appropriately position for it? Would you be a lion and bet big on red or black or would you be a sheep?

 

To be crystal clear, we don’t have any edge in accurately forecasting the rate of change in nonfarm payrolls. Between the seven analysts on our macro and financials teams, we have just shy of a cumulative 100 years of experience analyzing markets and economies in both buy-side and sell-side roles and not one of us has been able to build a model that consistently and accurately forecasts said number – or the rate of change in wages for that matter. The standard error on every model we’ve built is too high to rely on such estimates so we don’t bother to incorporate them into our views.

 

I guess we are the sheep.

 

Back to the Global Macro Grind

 

There is a reason our cash position in our model asset allocation is as high as it’s been since mid-December; we are dazed and confused and require the shepherding of Mr. Market. Like God, he doesn’t speak to you directly – or out loud for that matter. Fortuitously, we employ a number of rigorous quantitative methods to extract such guidance from the marketplace (like TACRM for example).

 

Our intermediate-term views of lower-for-longer and deflation has been wrong for several weeks now and we have no problem jettisoning such views if Mr. Market tells us to. In this regard, he hasn’t given us the signal(s) just yet, but he’s definitely thinking out loud enough for us to lack a high degree of conviction in those views.

 

One thing we do have a high degree of conviction on is our ability to forecast the rate of change in both growth and inflation. We are also pretty good at figuring out how trends in these omnipotent macro factors front-run changes in monetary policy.

 

On that front, inflation is likely to accelerate in 2H15 and the risk to that forecast is actually to the upside as far as timing is concerned. Our inflation tracker had forecasted a bottom in YoY CPI in June as of ~6 weeks ago, but we now have the disinflationary impact peaking in April (chart #1 and chart #2). You’ll note on our GIP model (chart) that the 2nd derivative delta on inflation (x-axis) is very small in 2Q. We’re still disinflating, but not by much from here.

 

As previously mentioned, the base effects for CPI get really easy in the 2nd half of the year (chart). Will the Fed use this as justification for “having confidence that inflation will return to their target over a reasonable timeframe” and set the stage for hikes in 1H16? Maybe. By then, however, real GDP growth will have likely slowed dramatically (chart).

 

Broadening our horizon, inflation is still slowing on a trending basis across the world’s key developed economies. Across many of the EM economies, however, it is accelerating due to annualized currency debasement (chart). From a forecast perspective, global inflation is in the same boat as the U.S. (chart).

 

The strong inflows into TIPs of late appear somewhat prescient in the context of those forecasts. Specifically, investors have piled into TIPS at the fastest pace in three years, with $3.6B of inflows into mutual funds and ETFs that track this market. This follows two consecutive years of outflows.

 

Can rates work when inflation is accelerating? Our backtest data shows that the long bond usually works in #Quad3, but certainly not as much as it does in #Quad4 and arguably not when the Fed is setting the table for rate hikes (chart #1 and chart #2). We are simply making the bet that those rate hikes are not coming; in fact, the narrative could be one of preparing markets for QE4 by the time we get the 4Q15 GDP report at the end of January 2016. We believe spread compression to be a high probability outcome from here (chart).

 

Since this is probably the only strategy note you’ll read this morning that doesn’t focus on the jobs report, we’ll leave you with another piece of seemingly-random-but-useful analysis. The key takeaway from the Chart of the Day below is that over the next 2-3 months, the preponderance of high-frequency growth data is likely to look optically better relative to consensus expectations from here. It literally can’t get much worse as far as the surprise factor is concerned and we’re quite sure expectations for a broad swath of indictors were lowered after that soft 1Q GDP print. Also, 2Q GDP will accelerate on a headline (i.e. QoQ SAAR) basis.

 

We believe rates have likely priced in these dynamics and see no reason for bond yields to chase them any higher.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.87-2.29%

SPX 2071-2099
VIX 13.63-15.84
USD 93.61-96.53
Oil (WTI) 54.22-61.93

Gold 1170-1214 

 

Best of luck out there,

 

DD

 

Darius Dale

Senior Macro Analyst

 

Dazed and Confused - Chart of the Day


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